Ethanol Mandate’s Sway On Corn Prices

If the mandate comes to an end, impact’s likely to be minor

In the halls of Congress, the discussion about the future of biofuel mandates is heated and the outcome is too close to call. How would corn prices be impacted if the ethanol mandate were wiped out entirely?

"The mandate increases corn prices by about 25¢ per bushel," says Bruce Babcock, Iowa State University ag economist, who spoke at the Federal Reserve Bank of Kansas City’s Agricultural Symposium in mid-July.

"The impact of policy mandates on 2013/14 producer profitability is modest," he says. This year’s Renewable Fuels Standard (RFS) mandate is 13.8 billion gallons of ethanol, increasing to 14.4 billion gallons in 2014 and 15 billion gallons by 2015. A 15 billion gallon mandate has only a modest increase on corn prices as well, in Babcock’s view.

"Without a 2014 drop in acreage, stocks could grow to 2.5 billion bushels," he says. That would represent a tripling in stocks from the current 2012/13 marketing year. Obviously, with or without a mandate, continued ethanol demand is important.

There is money in ethanol. What gives, and why does he believe the mandate would only have a minor impact on corn prices and ethanol demand?

"If you didn’t have the mandate, ethanol would still be 9% to 10% of the nation’s fuel supply," Babcock says. While oil companies did not welcome the mandate in the RFS, they found themselves making money by using ethanol as a cost-effective octane booster, taking lower octane petroleum and increasing it to required octane levels for ultimate sale, he says.

Ironically, at the same time oil companies are fighting the ethanol industry on higher blends in the future, ethanol is making them money today. "Since it’s profitable for oil companies to use ethanol, I assume that even without a mandate, they would continue to be rational when it comes to buying it," Babcock says.

Still, there are two variables that could, without a mandate, cause lower ethanol use. "If gasoline prices—caused by a major decline in crude oil prices—drop precipitously, then mandates have a larger impact," Babcock says.

If weather conditions are unfavorable enough to move corn prices higher, mandates will boost corn prices even higher, he adds.

Why not export ethanol? Eliminating the mandates would have another impact, Babcock says. The value of RINs (ethanol production credits) that oil companies purchase to meet the mandate are currently valued at $1.35 per gallon. Without the mandate, the RIN price would fall to zero, he adds. Even with a mandate, he sees RIN prices declining.

Without question, the mandates in the RFS have been important in creating 3 billion bushels in additional annual corn demand, or net 2.25 billion bushels, factoring in distillers’ dried grains, Babcock adds.

Corn ethanol production has increased by 8.5 billion gallons since 2006. Corn used for ethanol is now the No. 1 source of demand for the grain.

One impact of ethanol policy has been the diversion of 15 million to 20 million acres to corn production from traditional uses, Babcock says.

Moving forward, there is no reason why the U.S. ethanol industry could not grow its production by emphasizing exports, he adds. "If corn is inexpensive, why not export?" Babcock asks.